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E.C.B. Makes $500 Billion Infusion

FRANKFURT — The European Central Bank on Tuesday pumped 348 billion euros ($500 billion) into the financial system, easing conditions in credit markets grappling with a global lending squeeze linked to the United States housing downturn and traditional year-end demands for cash.

Market interest rates for two-week loans, the maturity at which the bank lent the money, plunged half a percentage point on Tuesday, to 4.45 percent. The duration of the loans will probably ensure that liquidity is readily available through the end of the year, credit analysts said.

The Bank of England also did its part, auctioning off £10 billion in three-month loans. But the British bank’s governor, Mervyn King, conceded on Tuesday that central banks, despite their ability to manufacture unlimited amounts of cash, are reaching the limits of their ability to ease the five-month-old credit crisis.

Despite a range of unusual liquidity injections, central banks in the United States, Europe and Britain have been unable to bring down spreads — the difference between their benchmark policy rates and rates that banks charge one another for short-term loans. The three-month lending rate fell a tenth of a percentage point, to about 4.8 percent, on Tuesday, far higher than normal.

That reflects a continuing reluctance of banks to trust one another’s creditworthiness because of extensive write-downs linked to bad investments in the deteriorating United States mortgage market — a problem central banks can influence only indirectly.

Photo

The Bank of Englands governor, Mervyn King, told Parliament that banks are nearly out of options to ease the credit crisis.Credit
Parliamentary Broadcasting, via Bloomberg News

“Even the operations we have put into place can’t be guaranteed and are unlikely to bring about a significant reduction in spreads except insofar as the operations can improve the confidence of the banking sector,” Mr. King told British lawmakers. “It’s hard to say whether it will turn out to be an important step.”

Mr. King was referring to liquidity injections in general, but also to a coordinated effort led by the Federal Reserve last week to infuse $64 billion into the system through central banks in North America and Europe. The results of that action will be announced on Wednesday.

Late Monday, the European Central Bank announced that it would guarantee unlimited two-week loans at a fixed rate of 4.21 percent, instead of taking its standard approach of fixing the amount it lends and allowing overall demand to determine the cost of borrowing. The normal tactic would have resulted in an infusion of about 180 billion euros, the bank said.

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Though the bank took the same approach when the credit crisis erupted in August, the scale of the intervention at that time — about 95 billion euros in overnight funds — was much smaller.

The scale of the effort left many market analysts puzzled as to why the bank stepped in so forcefully. Some speculated that the bank wanted to guard against a fresh outbreak of credit market chaos at the end of the year.

Though vexed primarily by the ripple effects of the United States mortgage crisis, credit markets are also coping with the surge in demand for cash that is common as banks clean up balance sheets and meet lingering obligations before the fiscal year ends on Dec. 31. The money lent on Tuesday will come due on Jan. 4.

“Atop the usual uncertainty, the E.C.B. was worried about what the year-end market might look like,” said Erik Nielsen, chief Europe economist at Goldman Sachs in London. “So they put a lid on it like only central banks can do.”

A version of this article appears in print on , on Page C5 of the New York edition with the headline: Europe Puts $500 Billion Into Banks To Ease Credit. Order Reprints|Today's Paper|Subscribe